Private Company Valuation

1. Private Company Valuation David Lamb Prospect Research Consultant Blackbaud Analytics

2. Agenda • Business 101 • Valuation concepts • Tools for valuation • Making it practical for fundraising

3. Business 101

4. Closely held stock • When a company incorporates, it issues shares, known as “outstanding stock” • The value of the company is divided evenly among the shares • “Publicly held” stock vs. “closely held” • Finding the value of public company stock is easy • Finding the value of private company stock is difficult and expensive

5. Why value a company? • The value of a company is influenced by the reason you’re asking the question • Reasons to value a private company: • To sell it • To raise capital from investors • Part of a divorce settlement • For a management buyout • For estate planning • For an employee stock ownership plan • For taxation • Change the purpose of the valuation and you change the stock price • Only fundraisers ask how it affects a gift

6. What is it worth? • What is a company worth? • It’s worth the tangible assets • It’s worth the assets + goodwill • It’s worth whatever someone will pay for it • Situations that increase the value: • A great product or service that people want to buy • Customers who can afford to buy it • Situations that decrease the value: • An obscure product or service with limited appeal • Price is too high or customers are too poor

7. Valuation Concepts

8. Valuation in the real world • Information typically is not available on private companies • The value of a company is not necessarily identical to the bottom line on the balance sheet • Companies with a negative cash flow can have a high value • Companies with a positive cash flow might have a modest value

9. Valuation in the real world • To find out what a company is worth, sell it • Value is partly (sometimes mostly) subjective • Sometimes D&B provides a net worth figure • Read everything you can about your target company – it’s not just numbers

10. Various ways to measure value • Book value • Price/earnings ratio (P/E) • Discounted cash flow • Comparison to similar companies

11. Comparable companies • Find a similar public company • Downside: a public company is almost always valued higher than an otherwise equivalent private company would be • Find a similar private company that sold recently • Downside: the only commonly available metric is sales, and value is not always clearly tied to sales or even profit • Comparison is only method that is possible if you have no access to the financial statements and appraisals of the assets is comparable companies

12. Valuation Tools

13. Comparison to public companies • Yahoo Stock Screener (http://screen.yahoo.com/stocks.html) • Parameters that can be used • Industry (SIC or NAICS) • Sales • Enter relevant info for the target company • Look for Market Cap. • Your target company value is probably considerably less

14. Comparison considerations • Your prospect’s industry and company sales rarely match those offered by Yahoo perfectly • Public companies tend to be much larger than their private counterparts • Read the profile to see if the comparison company is similar in purpose to the target • If the public company has flat or negative earnings, it may still have value • Same may be true of the private company

15. Comparison to other private cos • Business Valuation Resources (www.bvmarketdata.com) • Pratt’s Stats • Database of over 9,500 private company sales from 1990 to present • Deal price ranges from $1 million to $14.4 billion • Updated monthly with about 100 transactions added / month • $595 • Bizcomps • Database of over 9,500 private company sales from 1993 to present • 61% of the companies have gross revenues less than $500K • 18% of the companies have gross revenues over $1 million • $395 • INC. Magazine’s Ultimate Valuation Guide

16. INC.’s 2006 Valuation Guide

17. INC.’s 2006 Valuation Guide

18. BizStats.com • Select the industry • Enter the sales • Many elements of the cash flow statement are shown including an estimate of retained earnings

19. BizStats.com rules of thumb

20. Business classifieds • BizBuySell • GlobalBX • Search for business by line of business and state

21. Making it practical

22. Case Situation • Privately owned grocery chain (2 stores) in Nebraska • Founded in 1955 • 405 employees • D&B reports sales of $45.8 million • 200,000 square feet • No trend information is available • Major competition is a Super WalMart, recently arrived • Prospect is the son of the deceased founder

23. Using valuation guides • INC. Guide • Median sales for grocery stores: $773M • Median sale price: $200M • Valuation multipliers: • Best: 4.47 • Second and third best: 0.27 • BizStats Guideline • 11-18% of annual sales + inventory

24. Using valuation guides • Estimates using INC: • Sales of the target are well below the median, encouraging us to consider a lower estimated value • Using the second best multiplier: 0.27 $46 million = $12.42 million • Estimate using BizStats rules of thumb • 11% of sales ≈ $5 million + inventory • 18% of sales ≈ $8.2 million + inventory

25. Business classifieds • BizBuySell (search on 9/12/06) • No grocery stores found in Nebraska • Widened the search to include surrounding states • Results:

26. BizBuySell 1

27. BizBuySell 2

28. BizBuySell 3

29. Estimated Company Value - Summary • Target company sales: $46 million • Based on classifieds found, the target company is larger than most in the region • Known, but smaller stores are asking the low 6-figures • BV Resources (aka INC valuation guide) value: • Median revenue = $773 million • Low sales price = $14 million • Median sales price = $200 million • High sales price = $1.6 billion • BV Resources multiplier • 4.47*$46 million =$205.6 million • 0.27*$46 million = $12.4 million • D&B reported net worth: $6.9 million • Biz Stats rule of thumb for grocery stores = $5 million to 8.2 million + inventory

30. Estimated Value • The target company is worth • $300,000-600,000 • $2,000,000-10,000,000 • $10,000,000-20,000,000 • Over $50,000,000 • None of the above • I haven’t got a clue

31. Making sense of it all • The problem of company valuation is the same as for personal net worth:you can’t get the necessary information • The good news: you don’t need to pin down the precise value • You’d like to know: • If it’s $1M vs $100M • If it’s a going concern • If the industry is above or below the diagonal on the INC chart.

32. Making sense of it all Households with a net worth of $1-$10 million, 2001 IRS data, published in 2006

33. If the prospect owns 50% • Assume a company value of between $2 million and $10 million • The prospect’s share in the target company could be between • $5M (50% of $10 M) and • $1M (50% of $2 M) • Let’s split the difference at $3 million • Reduce the proportions of net worth (from the IRS chart) for property and stock because of the semi-rural area • This makes closely held stock a higher percentage of the prospect’s net worth – say 25%

34. If the prospect owns 50% • Net worth could be about $12 million (private company ownership of $3 million x 4) • 2%-5% might be philanthropic capacity • Capacity ≈ $240,000-$600,000

35. Consolidated resource list • Yahoo! Stock Screener: screen.yahoo.com/stocks.html • BV Resources: www.bvmarketdata.com • Inc. Valuation Guide: www.inc.com/valuation/index.html • BizStats: www.bizstats.com • BizBuySell: bizbuysell.com • GlobalBX: www.globalbx.com • www.lambresearch.com • White Paper www.blackbaud.com/resources/white-papers.aspx